Your Money.

Think Twice Before Transferring Assets To Heirs

Under New Medicaid Law, A Misstep In Estate Planning Could Trigger Penalties

February 04, 1997|By Kathy Kristof, Los Angeles Times Syndicate.

Quietly, with no fanfare and no discussion, U.S. lawmakers passed a bill late last year that could criminalize a certain type of estate planning. The law, which went into effect Jan. 1, was part of a much larger health reform measure and was aimed at stemming bogus claims for Medicaid, a government health insurance program for the poor.

But because of the way the law was drafted, it is possible that individuals could run afoul of the rules inadvertently at the worst possible time--when they're sick and unable to care for themselves.

"Granny could go to jail,' was the dramatic assessment of the Institute of Certified Financial Planners.

Attorneys counter that jail sentences are unlikely for practical reasons--jails are crowded enough without throwing in the ailing and confused individuals who might break this law--but they note that the law has had a "chilling effect" on a whole segment of the estate-planning industry.

"At this point in time, there is no way to tell anything," says Ira S. Wiesner, a Sarasota, Fla.-based lawyer and president of the National Academy of Elder Law Attorneys. The practice of so-called "Medicaid planning" has come to a virtual standstill, he adds, because "you would never know whether what you are doing constitutes an illegal act."

Already, there is an effort afoot to repeal the law. Meanwhile, attorneys and financial planners are scrambling to warn their clients that seemingly innocuous estate-planning procedures, including giving tax-free gifts to your children and grandchildren, could turn them into criminals.

The brouhaha pivots around a few paragraphs in the Health Insurance Portability and Accountability Act, which passed in August 1996. These paragraphs alter federal Medicare laws by imposing criminal penalties for those who transfer assets and later apply for federal health insurance assistance for the poor, commonly known as Medicaid.

Theoretically, the law does not change what's permissible. However, it stipulates that those who violate Medicare rules can be criminally prosecuted, facing up to one year in jail and a $10,000 fine. Although the law went into effect Jan. 1, two events trigger the penalties: a transfer of assets and application for Medicaid benefits. Could you be subject to the criminal sanctions if you transferred assets in years past but applied for Medicaid in 1997 or later? Possibly.

"That's the question," says Sally Hurme, attorney with the American Association of Retired Persons' legal advocacy group. "Because the law is written so vaguely, it's hard to tell."

Worse still, attorneys maintain that Medicare laws are so complicated--and have been for years--that you can easily run afoul of them accidentally. But in the past the only penalty for error was a financial one: You would be denied Medicaid insurance benefits for a set period of time. Now you could go to jail.

However, to fully understand the issues involved, a bit of background is necessary.

Several years ago, a new subspecialty of law emerged to handle what was seen as a growing problem among the elderly: health care impoverishment. As the elderly population began to burgeon--those age 85 and over are the fastest-growing segment of the population, according to census figures--so did the population in nursing homes. However, with the cost of nursing-home care ranging from $35,000 annually to more than $70,000, an increasing number of seniors found themselves running through their life savings in record time.

That was particularly problematic for married couples, where one spouse needed nursing care while the other was reasonably healthy and living at home. According to federal Medicaid laws, the spouse in the nursing home could only receive federal health insurance through the Medicaid program after the couple had spent all but a token amount of their own money. Ultimately, that meant that the surviving spouse was left in poverty.

So-called "elder law" attorneys came to the rescue with estate-planning techniques that artificially impoverished elderly individuals, leaving them with access to their money but officially eligible for Medicaid. These techniques were always controversial, labeled as "cheating" by the government, but many seniors considered them necessary.

In 1993, the government decided to address the problem head-on. In a major reform, Medicaid rules were changed allowing surviving spouses and disabled children to keep more assets. Meanwhile, civil penalties were imposed on those who gave away their valuables before applying for Medicaid. Specifically, the rules said that if you gave cash, stock or valuable property to a non-qualifying individual--anyone other than a spouse or disabled child--before entering a nursing home, you would be ruled ineligible for Medicaid coverage for a period corresponding to the number of months that gift could have paid for your care.

The law says that Medicaid authorities can look back three years to determine whether your past activities would trigger Medicaid penalties. So, in theory at least, your tax accountant may have advised you to pay for your grandchild's education back in 1995--when you were healthy and flush with cash. But in 1997, you have a medical emergency, large expenditures and are suddenly in need of long-term custodial care in a nursing home. If Medicaid authorities determine the gift to your grandchild was an impermissible asset transfer, you've become a lawbreaker.

"The problem is that Medicaid law is extremely complicated and technical," says Gregory S. French, executive director of Pro Seniors in Cincinnati. "Often, you do not know with certainty whether a transfer will be considered OK or not. Now, if you make a misstep, you can not only lose your Medicaid eligibility, you could face criminal prosecution. Good intentions are not significant."